NEW DELHI: Companies may be allowed to raise overseas loans for use by their infrastructure arms more easily under plans being considered by the government, as it presses ahead with its drive to boost capital flows into the country and shore up the rupee.

The finance ministry is considering relaxing some of the end-use restrictions that govern on-lending of funds raised via external commercial borrowings by firms to their arms executing infrastructure projects, helping these subsidiaries get access to cheaper funds while boosting capital flows into the country.

A senior government official told ET that besides easier end-use restrictions, the finance ministry could also press for a higher cost ceiling for such borrowings to reflect the rising risk aversion in international markets and India's changed risk profile.

"The plan is on the cards. We will take it up with the RBI for action," said the official, who declined to be identified.

The changes, if they are implemented, will add to the bouquet of measures announced by the central bank earlier this week as part of its package of measures to bolster the rupee that has repeatedly tested new lows in recent weeks.

The Reserve Bank of India (RBI) on Monday raised the ceiling for foreign investors' holdings in government bonds by $5 billion and permitted companies with foreign earnings to borrow overseas to repay Indian Rupee loans with a $10 billion cap.

It also allowed sovereign and pension funds to buy state bonds and lowered the minimum holding and maturity period for FII investments in Infrastructure Development Fund.

Unable to attract large foreign direct investment or portfolio flows, the government is increasingly looking to debt flows to augment its dollar reserves to fund its rising current account deficit, which is estimated to have risen to 4% of GDP in 2011-12 from 1.3% in 2007-08.

The easing of pressure on external account has seen the rupee drop more than 20% so far this year, making its Asia's worst performing currency.

The planned easing of external borrowing rules will enable firms' infrastructure arms to get access to cheaper funds. Most of these arms, which exist as project-specific special purpose vehicles (SPVs), and finding it increasingly difficult to raise debt on their own from domestic as well as foreign sources because they lack the balance sheet strength.

"SPVs are rated quite low as their project risks are high, making such borrowing very difficult or very expensive," said Manish Agarwal, executive director at PwC. He added that even if they are able to borrow on their own at a higher cost, they get hit by rate caps set by the RBI. Agarwal said that if parent firms can extend their own balance-sheets to their arms, borrowings could be much easier and cheaper.

Even after including hedging charges, overseas debt costs between 6% and 8% compared with 11-13% for domestic debt, making it an attractive option for firms executing capital-intensive infrastructure projects.

But several factors make it hard for these firms to raise money overseas.

The RBI's rules prohibit firms from contracting overseas loans at more than 350 basis points over the six-month benchmark Libor rate in case of loans with tenors between three and five years. The Central Bank's rate ceilings cap the spread over Libor at 500 basis points for borrowings with maturity beyond five years.

But rising risk aversion in global markets because of the Eurozone crisis and the possibility of a downward revision in India's credit rating has pushed the risk perception of Indian paper higher, necessitating an increase in the RBI's rate cap, which was last changed in November last year. A review of the all-in-cost ceiling is due on September 30, but the finance ministry may press for a decision earlier, the official said.